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VI. ‘To the extent that the Department is concerned about valuation, it should study the
issue in light of the comments received in connection with the Proposed Regulation,
and, if necessary, should engage in a separate rulemaking process specifically
addressing valuation. In any event, the "limitation" contained in subsection
(c)(2)(iii) of the Proposed Regulation should not operate to broaden the scope of
fiduciary status with respect to valuation of plan assets.

The Group respectfully recommends that the Department reserve the portion of the
proposed regulation on appraisal and valuation of assets as constituting "investment advice"
giving rise to fiduciary status. The Group is concerned that under the Proposed Regulation,
imposing fiduciary status on persons providing an appraisal, fairness opinion or information as to
the value of plan securities or property, is overly broad. In addition, the Group does not believe
that the "limitation" contained in subsection (c)(2)(iii) of the Proposed Regulation effectively
narrows this broad scope.

As written, the "limitation" contained in subsection (c)(2)(ili) of the Proposed Regulation
is confusing because it operates to expand rather than limit the scope of the fiduciary definition.
That is, by providing that "the preparation of a general report or statement that merely reflects
the value of an investment of a plan or a participant or beneficiary" does not constitute
investment advice if it is provided for purposes of complying with reporting and disclosure
requirements, the subsection means that preparing such reports or statements for purposes other
than reporting and disclosure is a fiduciary act. To say that every statement not made for
reporting and disclosure purposes that reflects the value of a plan investment constitutes
investment advice would be an incredible—and, the Group believes, unjustified—expansion of
the term "investment advice" as set forth in ERISA section 3(21)(A)(ii). Moreover, it would be
an exceptionally broad reading of the Proposed Regulation's subsection (c)(1)(i)(A)(1).

The Group is concerned that by including within the scope of what may be considered
fiduciary activities the preparation of a statement as to the value of an investment, the Proposed
Regulation inadvertently includes a number of activities that simply should not be fiduciary in
nature. It would cause many parties, such as appraisers and sub-custodians, to become ERISA
fiduciaries to plans when the parties have no direct contractual arrangement with the ERISA
plans, and indeed limited or no ability even to identify the ERISA plans to which they would
owe fiduciary duties. These include:

e Valuations performed by a sub-custodian or other sub-contractor of an account
holding ERISA plan assets, or, so long as the value is eventually provided to an
ERISA plan, valuations even of accounts that do not hold plan assets (i.e., private
funds in which benefit plan investors hold less than 25% of the fund);

e Valuations performed by an insurance company using Revenue Procedure 2005-25
safe harbor formulas to determine the fair market value of an insurance contract
distributed or transferred from a qualified plan for purposes of Code section 402; and


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retail brokerage account that would not require fee leveling or other prohibited transaction
compliance.

It is highly unlikely that Joe would understand the differences in standards applicable to
his legally distinct interactions with a single financial institution. He may well be aware that the
financial institution owes him a fiduciary duty with respect to his 401(k) account, and that such a
duty means the institution must act in his best interest. If he then learns that the broker is
technically a fiduciary as well, he will likely assume that the same standard applies to the
investment advice he receives from his broker with respect to his IRA and his retail brokerage
account. He would likely not understand that, although the broker, as a "fiduciary" under the
Proposed Regulation, is subject to the Code prohibited transaction rules with respect to the IRA,
this "fiduciary" label carries with it no corresponding legal standard of care, and Joe has no
mechanism for enforcing the Code provisions. In addition, Joe would probably be unaware that
the very same broker may be subject to a different standard of care in connection with Joe's
investment in the retail brokerage account.

Although there are certainly many times in which ordinary investors do not fully
comprehend the complex laws governing their interactions with service providers, in this
situation the confusion could cause Joe to believe that the advice he receives from his broker
regarding his IRA is made under the same fiduciary duties that govern his 401(k) plan. What Joe
will definitely notice is that his broker will either substantially increase the cost of services or
will simply be unwilling to continue to provide services.

For these reasons, the Group requests that the Department modify subsection (c)(4) of the
Proposed Regulation to apply only to ERISA-covered plans, at least until the Department gathers
further information about the impact of the Proposal on IRA holders and until the SEC
determines how to implement its study of broker-dealer standards of care under the Dodd-Frank
Act. In particular, the Group suggests that the Department modify the final sentence of
subsection (c)(4) to read as follows: "However, the provisions of this paragraph (c) shall, for
purposes of application of Code section 4975, apply only to plans subject to Part 4 of Title I of
ERISA."

If the Department is unwilling to modify this subsection, the Group requests that the
Department include two changes in the final regulation to ensure that fiduciaries of Code-
covered plans are treated no more harshly than those of ERISA-covered plans. First, the Group
requests that the Department clarify in the final regulation that, for purposes of the limitation
related to investment education as described in the Department's Interpretive Bulletin 96-1(d),
providing investment education with respect to a plan described in the Code (such as an IRA or
HSA) will not cause the person providing the education to be deemed a fiduciary. The same
standard set forth in Interpretive Bulletin 96-1(d) with respect to ERISA-covered plans should
apply to Code-covered plans as well. Additionally, the Group requests that the Department
create an additional section in that Interpretive Bulletin tailored specifically to the treatment of
investment education with respect to IRAs and other plans that, unlike 401(k) plans (that provide


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of the fiduciary definition are very significant because any person possessing the requisite status
can become a fiduciary even if the advice provided is not individualized (i.e., is just general
market information) and is not intended to be considered by the recipient in making investment
or management decisions with respect to plan assets.

In addition, the Proposed Regulation is inconsistent with Congressional intent in passing
the Pension Protection Act ("PPA") and undermines the prohibited transaction exemption for
participant investment advice enacted as part of the PPA. The PPA amended ERISA and the
Internal Revenue Code to add a statutory exemption permitting the provision of participant
investment advice through an "eligible investment advice arrangement." The Department shortly
thereafter issued a Field Assistance Bulletin clarifying that the level fee alternative under an
eligible investment advice arrangement applied to the compensation received by the individual
providing the advice and his employer, but not to that paid to affiliates of the fiduciary adviser.'?
The Proposed Regulation could substantially limit the application of this exemption and
therefore the provision of high-quality investment advice to participants and IRA account
holders. This is because many fiduciary advisers relying on the exemption will be affiliated with
broker-dealers that may receive variable compensation. Under the Proposal, these affiliated
brokers would be considered to be acting as ERISA fiduciaries in recommending their affiliates!
advisory programs, merely because the recipient "may consider" the recommendation. The DOL
has taken the position that a fiduciary engages in prohibited self-dealing if it uses any of its
fiduciary authority in a way that results in the payment of an additional fee to the fiduciary's
affiliate, so brokers would be prohibited from suggesting an affiliate's advisory program even
where that program meets all of the requirements of the PPA statutory exemption and provides
important assistance to the participants and IRA account holders.

In the Group's view, the cleanest and best approach to addressing the issues raised by
these status elements would be to eliminate subsections (c)(1)(ii)(A),(B), and (C) in the final
regulation. We believe that this step would remedy the inconsistency between the Proposed
Regulation and the language and interpretations of ERISA that have been in place for many
years, and would help prevent the problem of "inadvertent" fiduciary status.

With the "status" subsections eliminated, the Group believes that subsection (c)(1)(ii)(D)
of the Proposed Regulation, which describes the type of arrangement, agreement or
understanding that must exist between an adviser and a plan, participant or plan fiduciary for
fiduciary status to attach to the relationship, should be incorporated into section (c)(1)(i)(B), so
that subsection (c)(1)(ii) may be eliminated entirely.

Although, in the Group's view, subsection (c)(1)(ii)(D) represents a positive step toward
limiting the broad reach of subsection (c)(1)(i), the provision should require something more
than an agreement that advice "may be considered." Surely, it is difficult to imagine parties

'2 DOL Field Assistance Bulletin 2007-01 (Feb. 2, 2007) (available at:
http://www.dol.gov/ebsa/regs/fab_2007-1.html).


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greatest impact of any form of "leakage" affecting retirement plans.’ In its 2009 report on
retirement plan leakage, the GAO found that, under existing policies, about 15% of participants
initiate some form of leakage from their retirement plans, and of this, the substantial majority is
in the form of cashouts at a job change. The report also found that getting information to
participants about the long-term effects of these cashouts would help improve the existing
leakage problem. The Group cautions the Department that changing the position stated in
Advisory Opinion 2005-23A could substantially exacerbate this problem by removing from the
marketplace the primary source of information for participants about the long-term negative
effects of leakage. For these reasons, the Group believes that there are strong policy reasons why
the Department should refrain from adding any provision to the Final Regulation respecting
discussions with participants regarding distributions, and instead adhere to its position set forth
in Advisory Opinion 2005-23A that such conversations do not constitute investment advice.

In addition, as recognized by the Department in Advisory Opinion 2005-23A, distribution
scenarios often involve a participant who has already made the "fiduciary" decision to liquidate
his or her current investments in the plan, usually for reasons unrelated to the plan investments
(e.g., account consolidation, tax or estate planning, etc.). In these cases, the participant is not
seeking the adviser's opinion on whether doing so is prudent; he or she is only seeking advice on
the appropriate investments to make following the distribution. In such cases, advice on the
distribution proceeds no longer relates to plan assets and therefore cannot constitute a fiduciary
activity with respect to the plan.

Imposing a fiduciary definition that fails to recognize the distinction between advice with
respect to the assets of the plan and advice with respect to the investment of assets after they
have been distributed from the plan would serve to cut off participants’ access to a wide range of
non-investment-related professional advice on distributions. For example, a financial
professional or attorney may provide tax planning advice that only indirectly affects plan
investments, such as whether to rollover the participant's company stock holdings to an IRA or to
take an in-kind distribution. In this scenario, any investment commentary is likely to be limited
to general considerations, such as the ability to diversify the company stock holdings without tax
consequence in an IRA compared with an in-kind distribution. Such distribution advice is
directed primarily or exclusively at analyzing the tax aspects of the distribution without
evaluating the prudence of the plan investments.

We also note that a plan participant is not left without recourse if fiduciary status is not
imposed with respect to advice related to a plan distribution. Financial advisers are subject to
regulation under federal and/or state securities laws, and an adviser may also be subject to a wide
range of state law claims if he or she mishandles an IRA holder's funds or makes any material
misrepresentations concerning investments. Other professionals who may provide advice with

7 401(k) Plans, Policy Changes Could Reduce the Long-term Effects of Leakage on Workers!
Retirement Savings, GAO Report to the Chairman, Special Committee on Aging, U.S. Senate,
August 2009 (available at: http://www.gao.gov/new.items/d09715.pdf).


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February 3, 2011
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a limited core line-up of funds either alone or in combination with a wide universe of funds
through a self-directed brokerage window), offer a virtually unlimited universe of investments to
choose from. Finally, the Group requests that the Department revise subsection (c)(2)(ii) of the
Proposed Regulation so that its limitations on what acts constitute the rendering of investment
advice apply to plans described by Code section 4975(e)(1) as well as to individual account plans
as defined in section 3(34) of ERISA. At the very least, the application of the Proposed
Regulation with respect to Code-covered plans should be no broader and no more onerous than
its application to ERISA individual account plans.

IL. The Final Regulation should affirm and clarify the Department's Advisory Opinion
2005-23A, in which the Department took the position that a recommendation to a
plan participant to take an otherwise permissible plan distribution does not
constitute investment advice.

The preamble to the Proposed Regulation provides as follows:

The Department notes that it also has taken the position that, as a general matter, a
recommendation to a plan participant to take an otherwise permissible plan
distribution does not constitute investment advice within the meaning of the
current regulation, even when that advice is combined with a recommendation as
to how the distribution should be invested. Concerns have been expressed that, as
a result of this position, plan participants may not be adequately protected from
advisers who provide distribution recommendations that subordinate participants!
interests to the advisers’ own interests.°

The Department took this position, of course, in Advisory Opinion 2005-234, issued less than
five years before the Proposed Regulation. Specifically, in Advisory Opinion 2005-23A, the
Department opined that advising a plan participant to take an otherwise permissible plan
distribution, even when combined with a recommendation as to how the distribution should be
invested, does not constitute "investment advice" because it does not involve a recommendation
or advice concerning a particular investment of the plan.

The Group requests that the Department not rewrite its requirements related to
discussions with participants regarding distributions. In order for participants to receive
information from financial professionals necessary to help them make informed decisions about
plan distributions, the Department must remain consistent in this position. If financial
institutions are going to be deemed fiduciaries when they provide distribution consulting
services, they will simply stop providing such services, and participants will be left without
information relating to, among other things, the possible consequences of taking a distribution
before retirement age. In considering its approach on this point, the Group believes the
Department must recognize that cashouts of plan account balances at job separation have the

° Preamble to Proposed Regulation, 75 Fed. Reg. at 65266 (footnote omitted).


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or more of certain enumerated types of "status." The "status" elements identified by the
Department in the Proposed Regulation include: (a) representing or acknowledging status as an
investment advice fiduciary; (b) otherwise meeting the definition of a fiduciary under ERISA
section 3(21)(A)(i) or (iii); (c) being an investment adviser required to register under the
Investment Advisers Act of 1940; and (d) providing advice or making recommendations
pursuant to an agreement, arrangement, or understanding that such advice will be individualized
and "may be considered in connection with" plan investment decisions. »

By structuring the Proposed Regulation in this way, the Department has established an
approach that is incompatible with one of the central tenets of ERISA: that fiduciary status is
determined by function. See Pegram v. Herdrich, 530 U.S. 211, 225-26 (2000) ("[ERISA] does
not describe fiduciaries simply as administrators of the plan, or managers or advisers. Instead it
defines an administrator, for example, as a fiduciary only 'to the extent! that he acts in such a
capacity in relation to a plan.") (citations omitted); Mertens v. Hewitt Assocs., 508 U.S. 248, 262
(1993) (explaining that ERISA defines "fiduciary" in "functional terms of control and authority
over the plan"). Thus, with the exception of a named fiduciary, a person's "status" (let alone that
of his or her affiliate) has never been a basis on which to conclude that the person is a fiduciary
with respect to a particular plan.

A second and related problem with the "status" elements of the Proposed Regulation is
that it is unclear how the Department intends a person's status in one context to affect that
person's interactions with a plan in a different context. An important limitation on the scope of
fiduciary status under ERISA has always been that a person is a fiduciary only "to the extent
that" he or she performs certain functions. Thus, a person can be a fiduciary for some purposes,
but not a fiduciary for other purposes. For example, the Department has explained that members
of the board of directors of an employer which sponsors an employee benefit plans, as well as the
employer's officers and employees, will be fiduciaries "only to the extent that they have
responsibility for the functions described in section 3(21)(A)."'' Although we do not believe it
was the Department's intent to do so, the Proposed Regulation could be read as a significant
departure from the Department's long-standing approach. As discussed in section II, above, the
Group requests that the Department take steps to clarify that this is not the case.

The proposed new provisions of subsection (c)(1)(ii) provide that any person who has
acknowledged that he or she is a fiduciary, actually functions as a fiduciary, or is a registered
investment adviser, is, without more, deemed to be a fiduciary with respect to any of the very
broad types of advice listed in subsection (c)(1)(i). The consequences of these "status" elements

° The Group notes that, although the Preamble to the Proposed Regulation makes clear that a

person must meet the provisions of both subsections (c)(1)(i) and (c)(1)(ii) to be deemed an

investment advice fiduciary, see 75 Fed. Reg. 65263, 65267, the conjunction "and" that is needed

to connect those two subsections appears to be missing from the Proposed Regulation.

ut }, Proposed Regulation, 75 Fed. Reg. at 65277 (proposing new 29 C.F.R. § 2510.3-21(c)(1)(ii)).
1290 CER. § 2509.75-8, Q&A 4 and 5.


GRGDM LAW GROUP

Stephen M. Saxon
(202) 861-6609
sms(@groom.com

Jennifer E. Eller
(202) 861-6604

jee@groom.com February 3, 2011

By Electronic Mail to e-ORI@dol.gov

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: Definition of Fiduciary Proposed Rule
Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.
Washington, D.C. 20210

Re: Comments on Definition of Fiduciary Proposed Rule

Ladies and Gentlemen:

Groom Law Group, Chtd. represents a number of financial institutions and administrative
services providers that offer a variety of products and services to employee benefit plans subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and individual
retirement accounts ("IRAs") that are not subject to ERISA but would be impacted by the
proposal. The members of this group (the "Group") also sponsor ERISA-covered plans,
including individual account, participant-directed plans. This letter represents the comments of
the Group on the proposed Definition of Fiduciary Rule (the "Proposed Regulation" or the
Proposal") published by the Department of Labor (the "Department") on October 22, 2010.'

We appreciate this opportunity to file comments on behalf of the Group.

In its Proposal, the Department seeks to amend the regulation, in place for more than 35
years, that defines the circumstances under which a person is deemed a fiduciary under ERISA
section 3(21)(A)(ii) due to that person's rendering of (or authority or responsibility to render)
investment advice for a fee with respect to moneys or property of an ERISA plan. Group
members are extremely knowledgeable about the provision of investment advice with respect to
ERISA plans, fiduciaries and participants and understand the very significant effects that the
Department's Proposal will have on the employee benefits community. We request that a
representative of the Group be permitted to testify at the March 1, 2011 hearing regarding the
Proposal. We would also be pleased to meet with the Department to discuss the concerns of the
Group in greater detail.

' Proposed Regulation, 75 Fed. Reg. 65263 (Oct. 22, 2010).

Groom Law Group, CHARTERED
1701 Pennsylvania Ave., N.W. « Washington, D.C. 20006-5811
202-857-0620 + Fax: 202-659-4503 « www.groom.com


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February 3, 2011
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fiduciary must disclose that he or she is not undertaking to provide impartial investment advice
would similarly deter recordkeepers from providing an array of services with respect to offering
menus of investment options, resulting in harm to plan fiduciaries and participants.

In further support of this request, the Group notes that the Department has recently
finalized significant new disclosure requirements imposed on plan recordkeepers as "covered
service providers" for purposes of ERISA section 408(b)(2). The newly-required disclosures are
extensive and are designed to ensure that plan fiduciaries have adequate information to assess
recordkeeper compensation, as well as any conflicts that the recordkeeper may have in providing
services.'* The Group submits that these disclosure requirements will provide the protection that
the Department appears to be seeking to provide by encompassing such recordkeepers within the
definition of an advice fiduciary.

Vis The Final Regulation should clarify the types and frequency of disclosures that plan
service providers must make in order to comply with the "limitations" provided
under the Proposed Regulation.

The Proposed Regulation requires that a person acting as a seller (either by marketing
recordkeeping, brokerage, or other "platform'-related services, or by providing information to
assist in monitoring plan investments) must disclose or ensure that the recipient:

knows or, under the circumstances, reasonably should know, that the person is
providing the advice or making the recommendation in its capacity as a purchaser
or seller of a security or other property...whose interests are adverse to the
interests of the plan or its participants or beneficiaries, and that the person is not
undertaking to provide impartial investment advice. '

This requirement forces the service provider to choose between two options: (1)
accepting fiduciary status; or (2) branding itself a conflicted adviser. In particular, the Group is
concerned about the term "adverse" and the phrase "not undertaking to provide impartial
investment advice." In any business built on relationships, sellers and buyers both benefit when
the buyer feels as though she has received good value. As a result, sales relationships are not a
"zero-sum game" as implied by the Proposed Regulation, and characterizing the seller as
"adverse" is inaccurate. Similarly, if a person is "not undertaking to provide impartial
investment advice," the implication is that he or she is in fact providing conflicted advice.
ERISA does not support the giving of conflicted advice.

'S See 75 Fed. Reg. 41600, 41610 (July 16, 2010) ("The Department believes that compliance
with [the compensation disclosure] requirements will ensure that fiduciaries have meaningful
information with which to assess potential conflicts of interest on the part of their service
providers.").

"4 Proposed Regulation, 75 Fed. Reg. at 65277 (proposing new 29 C.F.R. § 2510.3-21(c)(2)(i)
(emphasis added)).


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entering into an agreement to provide advice that the parties expect will be ignored; a plan
fiduciary has an obligation to consider relevant information in the context of making an
investment decision. If the Department is uncomfortable with "a primary basis" as an element of
the test for fiduciary status, the Group suggests the standard be that an agreement, arrangement
or understanding be in place under which the adviser agrees to provide the services described in
section (c)(1)(i) in a way that is individualized to the needs of the recipient and is provided as
part of an ongoing advisory plan, program or arrangement. The Group does not believe that it is
reasonable to define as "fiduciary" isolated and one-off sales interactions or product descriptions,
but is concerned that, without modification, the Proposed Regulation would do just that.

The Group also suggests that the Department clarify that a person will not be an
investment advice fiduciary merely because he or she wears more than one "hat" with respect to
asingle plan. As discussed above, a person may provide both fiduciary and non-fiduciary
services to a single plan. It is even more likely that a single organization can wear two "hats"
one fiduciary and the other non-fiduciary with respect to a single plan. ERISA acknowledges
and permits this. A person can only be a fiduciary to the extent that he or she provides fiduciary
services; one cannot be deemed a fiduciary simply because of services provided by an affiliate,
or even by that same person in a separate context. The Department must make clear that the
mere fact that a person (or its affiliates) act in a fiduciary capacity (or as an RIA) in some
unrelated context, will not cause the person, without more, to be deemed a fiduciary simply by
engaging in an "advice" activity described in subsection (c)(1)(i) of the Proposed Regulation

IV. The Final Regulation should broaden the scope of the limitation available in
connection with marketing or making available a universe or menu of securities
from which a plan fiduciary may designate alternatives.

In the experience of members of the Group, plan fiduciaries frequently request "sample"
or "model" investment lineups from prospective recordkeepers. In addition, plan fiduciaries
often ask a recordkeeper to provide a lineup of investment alternatives into which participant
account balances could be "mapped" from existing options. Service providers may also "screen"
investment alternatives based on a set of objective or quantitative criteria, such as performance,
fees, ratings, etc. These services provide useful information to plan fiduciaries, and, in many
cases, the plan fiduciaries will not consider a prospective service provider that refuses to provide
these services.

Therefore, the Group requests that the Department either clarify that the limitation
contained in subsection (c)(2)(ii)(B) would accommodate such requests, or broaden the
limitation so that it does, Without a clarification of or a broadening in the scope of this
limitation, plan recordkeepers will be reluctant to provide the information requested by their
potential customers, and, as a result, plan fiduciaries will be less likely to make informed
decisions about investment alternatives and will be more hesitant to change plan recordkeepers,
even when they may otherwise deem it most prudent to do so. Additionally, as discussed more
fully in Section V, below, the requirement that a person offering a platform of securities to a plan


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respect to certain aspects of plan distributions, such as attorneys and CPAs, may also be subject
to discipline under their professional codes of conduct for failure to deal fairly with a participant.
In fact, applying fiduciary status to many such individuals may actually have the perverse effect
of denying participants a number of other avenues of relief, as ERISA would arguably preempt
most of a participant's potential state law claims against the adviser.

If the Department should decide to reverse its position in Advisory Opinion 2005-23A
that a recommendation to take a distribution, even when combined with a recommendation as to
how the distribution should be invested, does not constitute investment advice, we would urge
the Department not to impose fiduciary status unless the advice provider has solicited the
participant and is giving the participant specific advice primarily directed at the prudence of the
participant's plan investments or the plan's investment options, either by themselves or in
comparison with options available outside the plan. Only in such cases could the advice provider
be reasonably considered to have rendered investment advice with respect to plan moneys or
other property, as described in ERISA section 3(21)(1)(ii).

Finally, It should be noted that the Group disagrees with the view expressed in Advisory
Opinion 2005-23A, wherein the Department seemed to take the position that, once a particular
fiduciary becomes a fiduciary, every action that person takes with respect to a plan or a
distribution is a fiduciary act. That notion is inconsistent with the fundamental underpinnings of
how fiduciary status is determined under ERISA's functional approach, and it flies in the face of
other Department authority suggesting that an individual can operate in both a fiduciary and a
non-fiduciary role with respect to the same plan.’ The Group requests that the Department take
this opportunity to reiterate that the test for fiduciary status is a functional one, and to clarify that
a person's status as a fiduciary (or an affiliate of a fiduciary) is not a relevant factor in
determining whether he or she is a fiduciary in connection with distribution counseling activities.

Ill. The Department should eliminate the "status" of a person or his or her affiliate as a
relevant factor in the analysis of fiduciary function, and instead should require on-
going services and an explicit and mutual agreement, arrangement, or
understanding between the parties in order for a person to be deemed an investment
advice fiduciary.

Under the Proposed Regulation, a person will be a fiduciary to the extent that the person
engages in certain activities with respect to a plan, a fiduciary, a participant, or a beneficiary, and
such person "either directly or indirectly (e.g., through or together with any affiliate)" holds one

* See, e.g., Advisory Opinion 1997-16A; Bell v. Pfizer, Inc. 626 F.3d 66 (2d Cir. 2010); see also
section III, infra.


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cases, act to simply impose costs and risk on providers, which would, as they are today, be
passed through to IRA holders.

Moreover, in some circumstances, the commission of a prohibited transaction with
respect to an IRA can cause severe tax consequences for the holder of the IRA. Unlike with
ERISA plans, many prohibited transactions involving IRAs result in the assets of the IRA being
deemed distributed and thus immediately includable in the gross income of the payee. As a
practical matter, then, the Proposal's application of the new fiduciary definition to Code plans
could increase the negative tax consequences to IRA holders. In the Group's view, the protection
provided by the Code's prohibited transaction rules is insufficient to justify this risk.

Next, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act"), the Securities and Exchange Commission ("SEC") was directed to study the
standards of care that should apply to broker-dealers registered under the Securities Exchange
Act of 1934.4 The SEC Study on Investment Advisers and Broker-Dealers was released on
January 22, 2011.° The study addresses and makes recommendations with respect to a number
of issues central to the Proposed Regulation. Specifically, the study recommends a uniform
standard of conduct for broker-dealers and investment advisers. The Group recommends that the
Department review the study and coordinate with the SEC, rather than unilaterally enacting the
sweeping changes set forth in the Proposed Regulation.

The need for coordination with the SEC is particularly important in terms of helping
avoid confusion on the part of individuals trying to save for retirement. By applying the
Proposed Regulation to investment advice provided in connection with IRAs, the Department
would create a substantial risk of confusing even relatively sophisticated individual investors.
Consider, for example, the following fairly common scenario: Joe Smith participates in an
ERISA-covered 401(k) plan sponsored by his employer. In addition, Joe maintains an IRA and a
retail brokerage account. For his own convenience, Joe maintains his IRA and retail brokerage
account with the same financial institution that acts as recordkeeper and directed trustee for his
employer's 401(k) plan.

If the Proposed Regulation were finalized as currently drafted, the financial institution, as
plan recordkeeper and directed trustee, could owe fiduciary duties to the plan while acting in
both capacities and therefore be required to avoid prohibited transactions under ERISA. At the
same time, the individual broker—an employee of that same financial institution—that Joe deals
with for investment advice regarding his IRA would be a fiduciary by application of the
Proposed Regulation, yet only for Code prohibited transaction purposes. And that same broker
could owe a different standard of care to Joe with respect to the advice he gives Joe regarding his

* Dodd-Frank Act § 913; SEC Rel. No. 34-62577; 75 Fed. Reg. 44996 (requesting public
comments).
° Available at http://www.sec. gov/news/studies/201 1/9 13studyfinal.pdf.


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Page 15

e Valuations performed for the purpose of setting unit values (for insurance company
pooled separate accounts or bank collective trusts, for example) that will dictate
purchase and sale prices (including in connection with a unitized account holding
only publicly-traded stock and cash).

These examples illustrate why it is important for the Department to reconsider even
including appraisal and valuation activities within the scope of the Proposed Rule. If the
Department decides to retain subsections (c)(1)(i)(A)(1), the Group suggests that the Final
Regulation should eliminate the last clause of section (c)(2)(iii), which denies the limitation to
issuers of reports involving assets for which there is not a generally recognized market that serve
as a basis for plan distributions.

The Group appreciates the opportunity to comment on this important Proposal. We
would appreciate the opportunity to testify at the March 1, 2011 hearing on the Proposal, and we
would be happy to meet with the Department to discuss these comments or to provide additional
input as you work to finalize the Proposal.

Best regards,

Spo

Stephen M. Saxon

Jennifer E. Eller


GRCDM LAW GROUP

Office of Regulations and Interpretations
February 3, 2011
Page 3

e To the extent that the Department is concerned about valuation, it should study
the issue in light of the comments received in connection with the Proposed
Regulation, and, if necessary, should engage in a separate rulemaking process
specifically addressing valuation. In any event, the "limitation" contained in
subsection (c)(2)(iii) of the Proposed Regulation should not operate to broaden
the scope of fiduciary status with respect to valuation of plan assets.

Comments

lL The Proposed Regulation should apply solely to ERISA-covered plans and not to
"plans" as defined by the Internal Revenue Code.

The Proposed Regulation includes a subsection that would specifically apply the new
fiduciary definition not only to persons providing investment advice to ERISA-covered plans,
but also to persons providing investment advice to "plans" as defined by Internal Revenue Code
("Code") section 4975(e)(1).’ The Code's definition of a "plan" includes a number of types of
savings arrangements not covered by ERISA, including individual retirement plans (TRAs").?
The Group has identified several issues and concerns raised by the application of the Proposed
Regulation to IRAs:

First, although the Code contains provisions generally paralleling ERISA's prohibited
transaction provisions, the Code does not otherwise establish any standards of conduct for
fiduciaries, nor does the Code permit plans or their participants, beneficiaries, or fiduciaries to
bring suit for breaches of fiduciary duties or prohibited transactions. Therefore, the proposed
expansion of the fiduciary definition to include Code-covered plans provides no additional
protection for plans and their participants outside of that offered by the Code's prohibited
transaction rules enforceable by the Internal Revenue Service. Yet vastly expanding the
circumstances and individuals to which the Code's prohibited transaction rules apply could work
to harm rather than protect holders of IRAs. Chief among these harms are the increased costs
that the Proposed Regulation would impose on IRAs. Simply put, service providers to IRAs
would face a substantially higher risk associated with fiduciary status and would therefore charge
higher fees. Unlike participants in ERISA plans, who typically do not have the ability to select
the plan's service provider, each IRA holder has complete freedom to select providers and to
select the level of service he or she is willing to pay for. As a result, there currently exist in the
marketplace numerous [RA models—an IRA holder may choose to self-direct the IRA's
investments, or may choose to hire a fiduciary investment adviser, or even a discretionary
fiduciary to invest the IRA's assets. In this regard, costs generally increase as the level of service
and risk of providing the service increases. Rather than allowing individuals to choose a level of
service and cost with which they are comfortable, the Proposed Regulation would, in many

2 Proposed Regulation, 75 Fed. Reg. at 65277 (proposing new 29 C.F.R. § 2510.3-21(c)(4)).
> Code §§ 4975(e)(1)(B) and (C).


GRGOM LAW GROUP

Office of Regulations and Interpretations
February 3, 2011
Page 2

Summary of the Comments

As service providers to ERISA-covered plans, the Group shares the Department's desire
for an appropriate and straightforward regulation defining the circumstances in which a person
becomes an ERISA fiduciary as a result of his or her provision of investment advice for a fee.
However, the Group believes that the Proposed Regulation is so broad that it will impose
fiduciary status on a significant number of people and organizations whom Congress never
intended to be ERISA fiduciaries. And the consequences of the Proposed Regulation would be
contrary to the very purposes for which it has been proposed. Specifically, the ability of millions
of Americans to save for retirement will be hurt because financial institutions will not be able to
deliver critical investment tools, information and services, or will only be willing to do so at an
added cost to IRA account holders and retirement plan participants and beneficiaries. With the
number of self-directed plans and IRAs increasing, and the ability to rely on Social Security as a
source of retirement savings declining, it is more critical than ever that individuals be provided
with low-cost tools for retirement planning.

The Group has identified a number of serious concerns about the Proposed Regulation
and offers the following suggestions that the Group believes would provide a clearer and more
workable definition of an investment advice fiduciary:

e The Proposed Regulation should apply solely to ERISA-covered plans and not to
"plans" as defined by the Internal Revenue Code.

e The Final Regulation should affirm and clarify the Department's Advisory
Opinion 2005-23A, in which the Department took the position that a
recommendation to a plan participant to take an otherwise permissible plan
distribution does not constitute investment advice.

e The Department should eliminate the "status" of a person or his or her affiliate
as a relevant factor in the analysis of fiduciary function, and instead should
require on-going services and an explicit and mutual agreement, arrangement,
or understanding between the parties in order for a person to be deemed an
investment advice fiduciary.

e The Final Regulation should broaden the scope of the limitation available in
connection with marketing or making available a universe or menu of securities
from which a plan fiduciary may designate alternatives.

e The Final Regulation should clarify the types and frequency of disclosures that
plan service providers must make in order to comply with the "limitations"
provided under the Proposed Regulation.


GRGDOM LAW GROUP

Office of Regulations and Interpretations
February 3, 2011
Page 13

It would be far more useful for the seller simply to note that it is not giving "advice," but
that it is proposing a sale. If accompanied by the disclosure, described below, this would give
the recipient concrete information to inform his or her opinion about whether to purchase the
product or service being offered.

Although the Group recognizes and appreciates the Department's desire to ensure that
recipients of these services have an accurate understanding of the roles of their service providers,
the Group believes that this desire could easily be met without forcing services providers into the
difficult position the Proposed Regulation would impose. For this reason, the Group
recommends that the Department simply require that, as a condition of the "seller's" limitation in
subsection (c)(2)(i), the service provider disclose to the plan, the participant or the plan fiduciary
(as applicable) that the seller receives compensation on the products that are sold, and that the
compensation received may vary by type of product. In contrast to the broad statement that the
service provider "is not undertaking to provide impartial investment advice," this disclosure
would provide the service recipient with specific, useful, and understandable information that
would serve to apprise the recipient of the sales dynamic of the relationship.

The Group requests that the "seller's" limitation be expanded to cover the "sale" of
advisory products. Considering that the Proposal covers the recommendation of investment
management services, the Group is concerned that the Proposal could be interpreted to mean that
the recommendation of one's own investment advisory services (or those of an affiliate) could
constitute a fiduciary act, and therefore the seller's limitation, as modified above, should be
applicable in this situation.

In addition, the Department should make clear that the provision of general information
incidental to a sale of an advisory product or service would be permissible under the "seller's"
exception. This clarification is necessary to ensure a free flow of information in the context of a
sales presentation.

Finally, the Group requests that the Department revise the limitation so that it is not
limited to a situation where the adviser is acting "as a seller, agent or appraiser for a seller."
Specifically, a securities broker making trades technically acts as an agent for the buyer, not the
seller. The Group understands that the Department intends this limitation to apply to brokers and
therefore requests this change so that brokers would not be technically ineligible for the
limitation. We also ask the Department to clarify that a person is not barred from utilizing the
seller's limitation merely because, in another and separate context, the person (or an affiliate) acts
in a fiduciary capacity, and therefore has acknowledged his or her fiduciary status.